This Stock Should Spring Back to Life in the Second Half

Harsh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It’s been a very turbulent year for Skyworks Solutions (NASDAQ: SWKS). The maker of radio frequency (RF) chips has suffered from some bad luck as it has gained just 10% so far this year, despite posting two solid quarterly reports. The fact that it’s known more as an Apple (NASDAQ: AAPL) supplier has weighed on its performance and disturbed its momentum. Negative news regarding the iPhone 5 hasn’t gone down well with investors.

But, as we enter the second half of the year, which is traditionally a good time for chipmakers who thrive on mobile devices, it would be a good time to take a closer look at the company, especially considering that it is slated to release its third-quarter results on July 18.

On revenue

Analysts, according to Yahoo! Finance, expect Skyworks to post revenue of $435.4 million, which would represent an increase of 12% from last year, if achieved. The company shouldn’t have any difficulty meeting this target, as Skyworks had itself called for a similar number when it had released its second-quarter results.

The current estimate has been adjusted downward from $444 million, which was originally expected of Skyworks, but the company had guided below that estimate since the third quarter is usually a slow one for many chipmakers. But despite seasonality, a year-over-year growth of 12% isn’t too bad, and Skyworks should perform better going forward, driven by certain catalysts, which I’ll come to later.

On earnings

Analysts expect Skyworks to earn $0.53 per share, which is exactly what the company had guided for on its previous conference call. The original earnings outlook was actually a penny lower, but it has been adjusted upward to reflect the company’s guidance. Skyworks has consistently beaten earnings estimates in the past four quarters and we can expect to see the same this time, as the estimate is according to the company’s own comfort.

Moreover, Skyworks stated during the last earnings call that it expected gross margin to improve by 130-180 basis points in the third quarter, and considering this, an earnings beat isn’t a far-fetched fantasy.

On outlook

It is more or less clear that Skyworks would satisfy the estimates, and as such, the outlook (as always) would be of great importance. The company had issued a mixed outlook last time, but this time I expect it to do better.

As far as revenue is concerned, Skyworks should enjoy multiple tailwinds as we move further into the second half of the year, beginning with the next iPhone. It is rumored that Apple’s production of the next iPhone has begun, and the company might release it sometime in late September. Now, the next iPhone won’t be the only place where Skyworks should find a spot, since the company has been a regular feature in the previous iPads as well.

The production of the next iPads, especially an iPad mini with a retina display, should be another tailwind for Skyworks. While the iPhone might be maturing, the iPad mini witnessed great demand last year and a retina-toting version should find even more takers. Moreover, the prospect of a cheaper iPhone seems more likely by the day, and if it turns out to be true, both Apple and Skyworks will have a big market to tap in emerging nations.

As I mentioned earlier, Skyworks isn’t just dependent on Apple. The company also supplied content for the Samsung Galaxy S4, and this is what impresses me since Skyworks is usually positioned to hitch a ride with only the most popular mobile devices, ranging from an iPhone to a Galaxy to an iPad.

But, apart from these bellwethers, Skyworks is also expected to benefit from the booming Chinese smartphone market as more of the country's customers switch to smartphones. A significant number of consumers in China are switching to 3G devices, and the fact that Skyworks has relationships with the important players in the market (such as ZTE, Lenovo, and Huawei) should help its prospects further. Moreover, the 3G content carries a higher margin, which should help Skyworks further improve its earnings.

Skyworks’ solutions enable connectivity, and the proliferation of connected devices should expand the company’s playing field further. The popularity and prevalence of internet-connected homes and cars continues to increase, and as these trends catch on further, a company like Skyworks should do better.

Thus, I would expect a solid outlook from the company, driven by the ramp up in production by Apple and the growth in the Chinese smartphone market. However, the fact that the company is well-positioned to profit from a more connected world makes it a good long-term bet as well.

The bottom line

Skyworks has had a rocky ride this year, but the company is not at fault. If you eliminate the noise, Skyworks is a debt-free company with decent amount of cash on the balance sheet and trades at just 9 times forward earnings with a PEG ratio of just 0.61. Thus, if you own Skyworks shares and are frustrated with the non-performance, don’t be, since the company’s business and prospects look strong.

The company's upcoming earnings report should give us greater clarity, so be sure to check this space in a few days for the complete analysis of Skyworks’ results.

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Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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